Prospects for Turnaround Tuesday?

<br /> Prospects for Turnaround Tuesday? – Marc to Market<br />


The slide in the US dollar and US interest
rates faded in the North American session on Monday.  
US participants also had a fairly relaxed
initial response to news that after years
of complaining, the Republicans could not agree on an alternative to the
Affordable Care Act.  
Many observers
experience the currency market to be buffeted by many different forces. 
 Perhaps, because, unlike other assets, currencies in
their pure form do not generate a yield
stream that can be modeled, they seem to
be more subject to market fads.  However, our work continues to show the
strong relationship between the dollar and interest rate differentials.  This remains our anchor.
The chances of
Turnaround Tuesday materializing for the dollar will
be bolstered if US interest rates
  The US 2-year yield approached 1.22% yesterday before
recovering.   The link between the rate the Federal Reserve targets (Fed
funds) and the two-year note is stronger than at the long-end of the coupon
curve.  The two-year yield seems unreasonably low at 1.25% with a Fed funds
target range of 75-100 bp unless one does
not expect more than one hike over the next seven quarters.  During this
period, the median view of Fed officials is for five hikes over this period.
Under Occam’s Razor,
one can explain the recent price action in the foreign exchange market without
discussing US fiscal policy.  
The Fed hiked on March 15 and is often the case, buy the rumor
sell the fact activity, the dollar and US interest rates fell.  The
two-year note yield fell 17 basis points after the Fed
hiked rates in December.  The yield has declined 18 bp since the March
The day before the Fed hiked, Bloomberg’s
calculation showed a nearly 54% chance of a June hike to 1.00-1.25%.
 A week after the Fed hiked, the
odds had fallen to almost 47%.   The odds have slipped a little more to
The Dollar
Index fell from about 103.55 to near 99.25 in the weeks following last
December’s rate hike. 
 It made a high of around 101.70 on
March 15.   We saw that the two-year yield had
declined now as much as it did in December.  If the Dollar Index did this,
it would bring it toward 97.40.    However, the Dollar Index has
fallen for three consecutive weeks coming into this week’s activity.
 Technical indicators are stretched,
and the Slow Stochastics and RSI appear poised to turn higher.  
The euro has
advanced for four consecutive weeks. 
 It extended that rally yesterday,
briefly poking through $1.09.  It stopped just shy of the 61.8%
retracement of the losses suffered since the US election (~$1.0925).   It
traded above the 200-day moving average (~$1.0880) for the first time since
that election, though failed to finish the North American session above it.
 Technical indicators are stretched.
 Given the technical and psychological damage, we suspect that a period of
consolidation, with the $1.0800-$1.0820 offering support.  
The dollar approached
but held above JPY110. 
is an important area for technical and psychological reasons.  We note
that it corresponds to the 50% retracement objective of the dollar’s rally
since the US election.  The 61.8% retracement is found a little below JPY108.00.  Ahead of that is the
200-day moving average (~JPY108.30).   
The US 10-year
yield peaked when Fed hiked in December near 2.64%. 
 It fell to almost 2.30%.   The 10-year yield peaked the day before the Fed hiked earlier
this month near 2.63%.  At the low point yesterday, before the bounce, the
yield was briefly pushed below 2.35%.  
Sterling has
fallen only three times in the past 12 sessions coming into Tuesday’s session. 
 It has moved from the lower end of the year’s range
to the upper end.  It faltered yesterday after it moved above $1.26.
 Sterling has not traded above $1.28 since early last October.
 Initial support is seen near
$1.2550 and then $1.2520.  Wednesday’s notification that Article 50 of the
Lisbon Treaty is a formality and widely anticipated, which is not to take away
from its historic importance.  
In the North
American session, four Fed officials speak, including Yellen.
  On balance, we suspect that Fed
officials cannot be particularly pleased with the market response.  A seemingly
simple statement noting that the Fed had recognized the uncertainty surrounding
the outlook for fiscal policy and recent developments do not change that, could
help steer investor attention back to mostly healthy even if not spectacular US
growth dynamics.  
Oil prices also
recovered in North America yesterday, which supported the recovery in yields
and the dollar. 
 The $48.00-$48.50 area (basis the
May light sweet futures contract) may be key to the near-term outlook.  
Asian equities
have begun off the session on a firm
note, and this also supports the Turn Around Tuesday scenario.
  We had noted that the 2317 area was
the next target in the S&P 500, which
corresponded to the 50% retracement of this year’s gain.  It seemed like a
reasonable target as the position
adjusting ahead of the quarter-end became a more important consideration.
 The S&P 500 recovered after approaching it (~2322) yesterday.  
A move above 2350-2357 would lift the tone considerably.  


Prospects for Turnaround Tuesday?
Prospects for Turnaround Tuesday?

Reviewed by Marc Chandler

March 27, 2017

Rating: 5

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